Why is economic activity distributed unevenly across space, with centres of concentrated activity surrounded by ‘peripheral’ regions of lower density? What economic interactions are there between different geographical areas, and how do these shape income levels in the areas? How does the spatial organization of economic activity respond to exogenous shocks, such as technological change or policy measures? The contribution of ‘new economic geography’ (NEG) is to address these questions in a manner that is based on rigorous microeconomic foundations. It shows how the spatial structure of an economy is determined by the interplay between costs of transactions across space and various types of increasing returns to scale. The questions posed above can be addressed at different spatial levels — international, regional and urban. NEG provides a unified framework for analysis at these different levels.